What Speech!

What Speech!

For what was supposed to be a night where flesh was put on the bones on policy we saw nothing. What we did see however was a Trump acting like he cared but almost as if he was still on the campaign trail. And that is important because Trump was sadly lacking in the polls and would need to work hard to rally Congress to pass his Bills. Post his speech Trump’s numbers have risen and that probably means his initiatives could at least pass muster, only time will tel however.

So apart from his superlatives what did Trump give us last night. We got a great dose of nationalism but not much more but it was delivered Presidentially. From Trump’s speech last night we know that NATO members need to commit more money towards defense. NAFTA and other trade agreements are likely to be renegotiated, that Wall is going to be built the promise of tax cuts and the U.S. to be hostile against the WTO. The WTO is an organization that the U.S. has used very much to its advantage over the years however Trump believes that it is the WTO’s fault that China is the powerhouse that it is today.

The problem with all this rhetoric though is no detail. Sadly as far as infrastructure goes Trump has to start the promise and find projects, find the labour (that means illegals and he is trying to chase them back to Mexico and elsewhere) source the materials and start building. That takes time.

What equity markets don’t have is time and the equity markets will continue to rally for some time yet based on the promise of higher growth and inflation. The test will be can U.S. companies deliver on Trump’s promise and raise profits (easier with lower taxes). Where the equity markets may be heading is that the money that resides offshore for a number of companies will be used for dividends and share buybacks thus producing better returns. Sadly money won’t go to capex as that is risky for a CEO, and productivity looks set to fall further. There have been no incentives that I can see for raising productivity or spending on capex.

The current rally is not based on fundamentals.

Bonds on the back of the share price optimism were weaker. The 10 year U.S. treasury was about 6 bp higher on the day. The probability of a Fed rate hike in March (two weeks’ time) is now about 69% that’s double the level from the previous day. Bonds look likely to weaken further as the equity market strength continues. The current range of 2.6% to 2.30% could come under siege at some point if the equity optimism continues. This week also sees Yellen speaking later this week. Bond investors and Traders will be looking closely at what she has to say and the likelihood for a hike later this month.

Aussie Market Today.

Equity markets are expected be strong today and Aussie bonds are likely to be sold. The good news is that the Chinese economy appears to be growing and that’s good for equities, and not so good for government bonds. Credit continues to rally and will for as long as the equity market rallies. Commodities were stronger especially metals.